If you already have a catering business or are looking to start one, you might be wondering how your profit margins compare to others within the industry or other types of businesses.
Catering is a good sector to get into and profit margins tend to be higher than those of a restaurant due to the fact you don’t have to pay for a fixed premises or overhead expenses for staff.
Plus, you can plan ahead with more certainty and tailor your food purchases and staff count to the amount of events you already have scheduled, which will also end up saving you more money.
It’s important for you to have a good understanding of the normal standards that are set within the catering industry because this will help you set up your business and manage your costs in a way that will bring you great success in the long term.
Read our guide below to find out more about what the average profit margin of a catering business is and what the specific costs are that you need to watch out for when running your business!
What Is The Average Annual Profit Margin For Catering Businesses?
On an annual basis, the average profit before tax for a catering business tends to be around 7 to 8 per cent.
However, some popular catering businesses have accumulated a pretax profit of around 25 per cent.
So, if you do open your own catering business, you never know – you could end up becoming extremely successful and end up generating those kinds of profit margins as well!
What Are The Main Costs That Catering Businesses Have To Pay?
There are two main costs that catering businesses have to pay. These are food costs and labor costs.
Food costs are pretty self-explanatory and involve the price you have to pay to buy fresh produce, including standard food items such as meat, fish, fruit and vegetables. You will probably also have to buy things like sugar, flour and eggs to make pastries or desserts.
Labor costs are what you have to pay towards employing staff for events. When it comes to hiring employees, you usually have to decide whether you want staff on a contract or whether you want to get staff from a temp agency.
This is a very important decision that could affect your labor cost, but more on that later!
How Much Is The Cost For Food?
The cost for food for an average catering business should amount to between 27 and 29 per cent of the gross sales. In other words, if you earn $2,000 from an event that you’ve catered for, you should expect your food costs to be somewhere between $540 and $580.
In one sense, catering businesses have an advantage when it comes to purchasing food goods because you can rely on having a set menu and a specific amount of guests, meaning you can prepare the exact amount you need to buy and, therefore, organize yourself well before the event.
But, in another sense, you can sometimes be at a disadvantage with this because the menu will need to change depending on what each individual client wants for their event, which means it becomes difficult to buy food in bulk (which tends to be cheaper) as you’ll probably end up incurring a lot of wastage if you do.
But as long as you plan everything with scrupulous attention before each event, the advantages should end up outweighing that one disadvantage!
How Much Is The Cost For Labor?
Typically, the labor costs for an average catering business should be less than those of the food products.
The costs should amount to between 16 and 17 per cent of the gross sales. So, again, if the event you’re catering for generates a revenue of $2,000, the labor costs should be somewhere between $320 and $340.
As briefly touched upon earlier in this article, there is always an important decision to be made by catering businesses when it comes to how they choose to hire their staff.
Due to the fact the events you will cater for – such as weddings – occur intermittently, you must decide whether it’s better for your business to hire employees on a contracted basis or whether it’s best to hire them from a temp agency.
Both of these options have their advantages and disadvantages. Hiring staff on a contract means you have to give them a certain amount of contractual hours for their work, but this might end up costing you more money. However, you can guarantee that these workers will be highly skilled.
Whereas, if you hire staff from a temp agency, it will cost you less in the long term, but they tend to be less skilled and not as efficient due to the fact they’re only coming in for a short period of time and aren’t familiar with your business or the way that you work.
Are There Any Additional Costs Catering Businesses Can Face?
Although food and labor costs are the two main things you have to pay for, there can also be additional costs for your catering business.
Many caterers will have to pay rent to hire out a commercial kitchen, which will act as a base. You usually have to do this if you want to cater for large events, which in turn will bring you more money.
If you do choose to only cater for small events, though, you might be able to get away with using your own kitchen – but it could get messy!
Other costs for catering businesses include: equipment, vehicle and travel expenses, business loans, advertising, insurance, and interest expense.
If you’re thinking of opening a catering business or you already have one and simply want to understand the costs better, we hope this guide has informed you well.
So, now you do have all the information, you can make sure you’re getting the most out of your business and know exactly what your profit margins should be!